Market Mover - BNP PARIBAS - Investment Services India

This section is classified as non-objective researchEMU Debt Monitor: SSA and Covered Bonds• Significant movements in spreads in coreEGBs and SSA have opened the door tointeresting trade opportunities.• In particular, the massive steepeningdeveloped in French OATs contrasts markedlywith the lesser dynamics observed within theCADES curve.• We recommend playing this dislocationthrough a box trade CADES/OAT 5/10y orthrough a compression trade CADES/OAT 5y(April 2016). Target 25bp profit over the nextthree months.Opportunities arise from spillover into core SSARecent comments from rating agencies havepressured French OATs lately, driving themsignificantly wider in ASW terms. The impact on coreSSA was twofold, with a noticeableunderperformance from CADES, EIB, EU and EFSFon the one hand, while KFW remained quite resilientin this nervous environment (Chart 1).Significant movements in spreads in core EGBs andSSA have opened the door to interestingopportunities that are worth considering.In particular, in the sell-off, French OATs havesteepened massively, a dynamic not observed withinthe CADES curve (Chart 2). According to our inhousegeneric indices, the box CADES/OAT 5/10y istherefore back at the all-time high seen during theLehman crisis. This observation comes despite thismorning’s price action in French OATs, which haveoutperformed significantly since the EU Summit.Indeed, whereas CADES/OAT 10y is back to levelsclose to the long-term average, after having peaked,CADES/OAT 5y is back at the all-time high seenduring the Lehman crisis (Chart 3). Therefore, werecommend playing this strong dislocation, eitherthrough a box trade CADES/OAT 5/10y (enter aflattener in OAT 5/10y combined with a steepener inCADES 5/10y), or through a compression tradeCADES/OAT 5y (buy CADES Apr-16 versus shortOAT Apr-16). Target 25bp profit over the next threemonths.As far as EIB and KFW are concerned, it isnoteworthy that EIB remains fairly priced relatively toboth CADES and KFW taken together. However, EIBsteepened significantly over the past month, while302520151050-5-10Chart 1: Spillover into Core SSA –Performance in ASW btw 17 Oct and 26 Oct2y 5y 10yKFW CADES EIB EU EFSFSource: BNP Paribas50403020100Chart 2: CADES 5/10y vs OAT 5/10y –Strong Dislocation-102006 2007 2008 2009 2010 2011Source: BNP ParibasCADES 5/10y FRTR 5/10yChart 3: CADES/OAT 5y – Back to All-Time Highs706050403020100-102006 2007 2008 2009 2010 2011Source: BNP ParibasLEHCADES/OAT 5yKFW lagged strongly behind. As a result, KFW looksexcessively flat compared with EIB and other peers.A box trade EIB/KFW (enter a flattener in EIBcombined with a steepener in KFW) can be enteredto profit from this recent decoupling. It works in both2y/5y and 2y/10y. Target 15bp profit in the shortterm.Camille de Courcel 27 October 2011Market Mover44www.GlobalMarkets.bnpparibas.com